Category: Economic Performance

Policymaking: Before, During and After the Crisis

Michael O’Sullivan writes in today’s Irish Times about the importance of establishing a new policymaking institutional structure in the wake of the crisis: you can read his article here.   In his contribution, he identifies the pro-cyclical nature of fiscal policy as one of the main problems:

“The second related issue is the topsy-turvy nature of Irish economic policymaking. In an economy that is expanding too quickly, the normal approach is to try to slow it down; and when it is contracting, the typical response is to support or even stimulate it. In the early years of this decade, our politicians and policymaking “elite” responded to a very “hot” economy by lashing on more fuel. Now they respond to one of the sharpest contractions ever in a developed economy by squeezing harder on the brakes.”

It is certainly vital that the political system in the post-crisis era finds institutional mechanisms that can guard against procyclicality.  It would have been helpful in responding to the current crisis if the fiscal situation had permitted some level of counter-cyclical fiscal intervention.  However, the scale of the structural fiscal deficit (determined by the skewed nature of the pre-crisis tax system) means that the general nature of the government’s fiscal adjustment strategy is conditionally optimal  – it cannot un-do the past.  (Of course, there is still plenty to debate in terms of the precise design and timing of the fiscal adjustment.)

Innovation Taskforce: Request for Submissions

As suggested by Chris Horn in the comments,  you can make a submission to the Innovation Taskforce via this website.

Competitiveness Benchmarking Report

The NCC has released its benchmarking report (you can download it here).

The National Competitiveness Council (NCC), which reports to the Taoiseach on key competitiveness issues facing the Irish economy, today published its Annual Competitiveness Report: Volume I, Benchmarking Ireland’s Performance. The report provides an assessment of the competitiveness strengths and weaknesses of the Irish economy relative to competitor countries.

The Irish economy is experiencing a rapid and painful adjustment to the bursting of the property bubble, the international financial crises and the downturn in world trade. As a small, open and competitive economy, Ireland prospered from an export boom driven by globalisation and investment in the 1990s and early 2000s. In recent years, strong growth in the domestic economy, driven by housing and consumption, replaced exports as the key driver of growth. Though economic growth rates remained strong, our international competitiveness weakened as the domestic boom increased the costs of doing business here and as reforms to improve competitiveness were delayed.

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Where are the Wage Cuts?

Q1 Earnings data were published by the CSO ten days ago, and I’ve only just got around to having a look at them. The data refer only to Industry (Manufacturing, Mining & Utilities) and Financial Intermediation; the new Earnings, Hours and Employment Costs Survey on which these data are based also collects for Construction and Distribution and Business Services, but data on these sectors haven’t been published yet, so the most up to date figures for these refer to December 08.

I went to look at the data because I had a hunch that earnings cuts were being driven by flat hourly pay and falling hours.

I was concerned about this as it seems to me that hourly earnings are more important than weekly earnings for competitiveness – where hours of work have been cut, and earnings have fallen only for this reason, we should see this being reversed if and when demand picks up again, so this won’t result in a long term improvement. (It is possible that the recession has allowed employers to reduce overmanning/featherbedding and that this will be a permanent effect on productivity, but I doubt if that’s the main story.) 

In any case, I was wrong: the flat pay just doesn’t seem to be there. In fact, the short answer to the question in the title is: in Financial Intermediation and Mining. Everywhere else, there are wage rises.

For industrial workers, average hourly earnings rose by 5.9% from Q108 to Q109. This figure includes bonuses and overtime payments. Weekly hours fell by 2.4%, though, so the increase in average weekly earnings was just 3.4%. Within industrial workers, weekly earnings of those in Mining fell by 8.1%, but this was entirely due to a fall in hours of work, with hourly wages actually rising by 1.5%.

Within Industry, a breakdown by occupational category is also given. Managers & professionals’ hourly pay rose by 3.5%, and their weekly pay by 2.9%; Production workers’ hourly pay rose by 5.2%, weekly by 1.2%; only Clerical workers’ pay has fallen – the hourly figure is down by 0.9%, and the weekly is down by 1.2%. Interestingly, the reason the headline figure – the +5.9% I mentioned above – is higher than any of these occupational category components is because of a pretty big shift in the composition of workers –  the number of Production workers has fallen by 12.3% whereas the number of Managers has risen by 2.1% and the number of clerical workers by 1.9%. So the proportion of chiefs has risen.

For Financial Intermediation, average earnings have fallen, and all the action is in bonuses. Hourly base wages have actually risen by 5.4%, but bonuses fell by 65% between Q108 and Q109. The average bonus was 30.6% of base salary in Q108 but ‘only’ 10.1% in Q109. Because of the collapse of bonuses (relatively speaking – the average industrial worker got a bonus of 7.4% of base pay in Q109), average total hourly earnings fell by 11.1% and average weekly earnings fell by 12.7%.

As I mentioned, CSO hasn’t published the Q109 figures for Construction or Services yet. But the figures for Q408 compared to Q407 showed that while average weekly pay in Construction was down 2.4%, average hourly pay was up 2.3%; and in Services, weekly earnings were up 3.1% between December 07 and December 08. No hourly figures are given.

It all seems a far cry from the heady days of April, when very large nominal pay cuts in the private sector were being discussed in the media. In a post on this blog, Colm McCarthy tentatively concluded, on the basis of some private surveys, that “[B]earing in mind the different periods covered, it looks as if the private sector pay cut overall, allowing for the small number paying increases and the larger number of freezers, has already reached 6 or 7%”. I was sceptical, but thought that 3% was quite likely.

Is it the case that Industry alone is escaping pay cuts and that when the Q1 figures come out for Construction and Services, the numbers will add up to substantial nominal cuts? Or were we just dreaming? Did we just want to believe that Irish workers were proving very amenable to the kind of cuts needed to improve competitiveness? Or is there some other detail of the data that I’m not appreciating that’s masking the truth?

New IMF blog and Potential Output

The IMF has established a new blog: the link is here.  The most recent entry is about the measurement of potential output and the adverse impact of financial crises on the level of potential output – interesting reading.